Wednesday, July 01, 2015

Next Up: Sudden Deal?

A few more thoughts on the developing situation in Greece:

Alexis Tsipras

Greek PM Alexis Tsipras has been criticized (rightly) for making the referendum question hard to understand. Various ECB spokespeople have tried to (mis)represent the referendum as a choice between staying in the Euro, or leaving (which is an unhelpful oversimplification). Tsipras has put yet another spin on things: He recently told a TV interviewer, in essence, that he would resign if the referendum failed to produce a resounding No vote.
Hence, the referendum would be an up or down vote on Tsipras himself. A Yes vote means he steps down.

Until now, polls have been showing that Greek voters favor a Yes vote. But more recent polls have been showing growing support for a No vote.

Both sides have been issuing public statements that indicate hardened positions. (Merkel just gave a speech containing hard-line statements.) This is typical of parties that are actually near an agreement after back-channel negotiations.

The Germans, aware of shifting Greek public sentiment (rapidly shifting toward a No vote, unfavorable for the Germans) and eager to resolve a rapidly deteriorating situation before they're left with worthless bonds and a broken Euro project, are probably anxious to reach resolution (much more so than Merkel is going to admit publicly; recall that for political reasons, Merkel needs to maintain a tough public posture).

Tsipras has been saying said a referendum will go ahead regardless of whether a deal is reached before Sunday. But there are also rumors that he will soon cancel the referendum. The most likely scenario is that if a back-channel agreement has been made, the Germans have insisted on cancellation of the referendum as a condition of the deal.

The problem for Merkel is how to stage-manage the emergence of any sudden return to negotiations, so it doesn't look like she's caving. A sudden deal, at this point, is potentially damaging to Merkel's hard-line appearance.

If Tsipras cancels the referendum without a deal in hand, it means a deal is close and the Germans insisted on cancelling the referendum as a precondition of signing the new deal. Tsipras is forced to cancel the referendum as a show of good faith.

The dynamic is: Germans insist, behind the scenes, on cancellation of referendum. In public, Merkel says the referendum must go ahead. This allows plausible deniability.

An exit from the Euro is unlikely, at the moment. For that to happen, the referendum would have to produce a No vote and the Greek government would have to announce its intention to roll out a new currency (which takes time, although it's possible the drachmas have already been printed). There is no mechanism by which ECB could unilaterally force a nation out of the Euro, nor would it want to (since this would mark the failure of the unified currency project). If Greece leaves, it will have to be because Greece undertakes dramatic action on its own, in defiance of creditors, which is unlikely.

Having said that, if ECB takes the (unexpected) action of declaring Greek banks insolvent and begins seizing assets, the Greek government would have little choice but to create a new currency to restart the financial system. This would not be likely to happen sooner than July 20 (when the next big ECB payment is due). That's when ECB would go to the doomsday "bank resolution" strategy.

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